now is the time - ge.com · engines operating in chp mode have been installed globally since 2006....

GE Power

Now is the time......for Combined Heat and Power

04 Executive Summary05 A Bit of History Distributed Generation Combined Heat and Power: There at the Beginning Now You See It … Now You Don’t …

09 This Time is Different The Catalysts

1. Demand for Resilient Power Systems 2. Climate Change 3. Energy Democracy 4. Regulatory and Policy Actions 5. Shrinking Price Gap 6. New Combined Heat and Power-Friendlier Business Models 7. Reciprocating Technology and IoT Advances

Now is the time... for Distributed Generation Adoption

22 Conclusion

Contents

3

A Bit of History

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1 Platts Utility Database International, World Electric Power Plant Database, June 2016. Count excludes desalination plants.2 Platts UDI World Electric Power Database, June 2017.3 GE Distributed Power marketing, 2016. Estimates are derived from multiple publicly available sources and internal research.4 Bloomberg New Energy Finance, New Energy Outlook 2017, June 2017.

Thomas Edison’s Pearl Street Station went on line in 1882 as the very first “central” power station, and the excess thermal energy generated by the General Electric founder’s plant produced heat for local buildings and steam for local manufacturers. But, even though CHP is literally as old as the power industry, it rarely merits mention in lists of cleaner energy sources.

Still, CHP installations can be found nearly everywhere in the world 1 – in over 150 countries for a total of 814 GW. (An additional 81 GW of CHP plants have been decommissioned.)2

Analysis by GE’s Distributed Power business indicates that an average of roughly 2,400 MW per year of reciprocating engines operating in CHP mode have been installed globally since 2006.3 (2009 and 2010 were exceptions caused by the fallout from the global recession.) For comparison, by the end of 2016, there were approximately 480 GW of wind turbines installed, globally.4

Distributed Generation Combined Heat and Power: There at the Beginning

• CHP installations totaling 712 GW have been installed in 154 countries.

• GE’s Distributed Power business has determined that about 2,400 MW per year of reciprocating engines operating in CHP mode have been installed globally since 2006.

Both distributed generation (DG) and combined heat and power (CHP) have been with us since the dawn of electricity. CHP has repeatedly been hailed as one of the most efficient forms of creating power and heat, while DG is considered one of the most efficient forms of distributing it. But while the cost of investment is lower and returns are quicker, DG and CHP just haven’t really caught on.

Now, a confluence of factors are aligning that are starting to make DG-CHP plants a major, lasting contributor to global energy production.

Executive Summary

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CHP installation has had its ups and downs. The first wave took place in the former Soviet Union, which has the “largest and oldest district heating system in the world,” 5 according to the International Energy Association. Beginning in the early 1950s and peaking in the mid-1970s, but continuing at a strong pace until the dissolution of the USSR, CHP was an obvious choice for this centrally planned economy that experienced long and cold winters and needed affordable energy for its population.

Another upsurge in CHP installations is still ongoing in Europe but was particularly strong in the late 1990s, driven by very concerted sets of policy actions. For example, laws in Germany provided incentives for small CHPs, set goals for CHP-derived electricity, designed a CHP building code, and set tax exemptions for fuel use in CHPs. In the Netherlands, the 1989 Electricity Act

promoted CHPs so successfully that it created a capacity surplus in the power sector, and by 1994 the government had to ban new CHPs larger than 2 MW for a few years. 6 Later policies included a tax credit in 1997 and a feed-in-tariff in 2001.

There was an upsurge in CHP in the United States, too, from the mid-1980s until the mid-2000s (including a very defined “wave within a wave” from 2000-2005). The Public Utilities Regulatory Act (PURPA) 7 arguably was the single largest motivating factor behind the CHP trend, though electric sector deregulation and the creation of Independent Power Producers (IPP) certainly played a significant role as well. CHP tax credits implemented around the time of PURPA and later expanded by the 2008 “stimulus act (American Recovery and Reinvestment Act)” were important factors, too.

The fourth – and by far the largest – CHP movement took place in China, starting in the 1990s and growing exponentially in the 2000s. China’s rapid industrialization and simultaneous growth in energy demand has been well chronicled: The Platts data show that China’s utilities – particularly those in the colder northern regions – installed roughly 7.5 GW per year of steam coal CHP from 2000 to 2015, while all technologies and non-utilities in China installed roughly 12.6 GW per year of CHP in that same period. CHP segments with high adoption include municipalities, universities, schools and hospitals (”MUSH segments”) due to significant heating, cooling and electricity loads for critical infrastructure. 8

Although technological and economic assessments of CHP generally have been rosy, the reality often has fallen short of expectations. Note the tone of this paper from 1988: “Britain is still losing money at a rate of at least £1.4 million a day by failing to implement plans for nationwide city-scale CHP systems, and many CHP enthusiasts even suspect a political conspiracy in favor of nuclear power.” 9

In fact, while the upsurges in the UK and Europe, the US and China all suggest that CHP had emerged as a major player, a closer look at the data reveals some important qualifying facts:

• The only true, sustained CHP boom at manufacturing facilities apparently happened in China, with the greatest growth, from 2012-2015, presumably driven by China’s post-global recession industrial policies.10

• A mini-wave of manufacturing sector CHP in the US coincided with PURPA and deregulation, but the annual installations were quite small compared to the US power sector.

• Europe witnessed a similar mini-wave in the 1990s and a few years of higher-than-normal installations in the mid-2000s, but again the totals relative to the European power grid are small.

• CHP at commercial facilities (e.g., hospitals, retail centers, laundromats, resorts, etc.), apparently experienced no real wave.11, 12

The International Energy Agency (IEA) sponsors a program known as the IEA CHP/DHC Collaborative, whose mission is to “promote the deployment of cost-effective, clean and efficient CHP and District Energy technologies and assess related global segments and policies.” 13 The Collaborative has produced a series of very useful country CHP profiles and other analytical reports that, collectively, serve as a recent history of CHP deployment.

In 2008, the first report stated that, “At their 2007 Summit in Heiligendamm, G8 leaders called on countries to ‘adopt instruments and measures to

significantly increase the share of combined heat and power (CHP) in the generation of electricity.’ ” 14 Besides enumerating the many benefits of CHP systems – cost savings, lower CO2 emissions, less reliance on imported fuel, reduced infrastructure investment, more network stability and use of local resources – the report mentioned an “accelerated scenario” that prescribed a series of actions that individual G8 governments could take to increase the rate of CHP-generated electricity from 11% to a projected 15% in 2015 and 24% in 2030.

However, the IEA’s most recent paper in the CHP series (from 2014) expresses the frustration, felt by many in the energy community, that CHP has not been more widely adapted, despite its many benefits. While these technologies represent a considerable share of the energy generation portfolio in some countries, global deployment of co-generation and efficient DHC has been much less successful. Global electricity generation from co-generation was reduced from 14% in 1990 to around 10% in 2000, and it has remained relatively stagnant since then. 15

5 International Energy Agency (IEA), International CHP/DHC Collaborative, “CHP/DH Country Profile: Russia.” https://www.iea.org/media/topics/cleanenergytechnologies/chp/profiles/russia.pdf 6 International Energy Agency, International CHP/DHC Collaborative, “CHP/DH Country Scorecard: The Netherlands.” https://www.iea.org/media/topics/cleanenergytechnologies/chp/profiles/Netherlands.pdf 7 PURPA mandated that utilities had to buy power from “qualifying facilities” at the avoided costs of generation. That is, if a non-utility generator were to offer electricity for sale to the wholesale utility, the utility had to pay at least its own opportunity cost for generating power.8 Strategic Horizons: Combined Heat and Power - Can Cogeneration Come Back? October 26, 2017

9 Babus’Haq, R.F., et al., “Assessing the Prospects and Commercial Viabilities of Small-Scale CHP Schemes,” Applied Energy 31 (1988), 19-3010 In 2008 the IEA determined that nearly 80% of CHP installations are at industrial facilities (perhaps not on a MW basis), so the Platts data may be misleading. IEA “Combined Heat and Power. Evaluating the Benefits of Greater Global Investment.” 200811 The Platts data suggests a mini-wave of commercial CHP at Brazilian sugar mills, given that Platts classifies these mills as commercial. However, sugar mills are arguably manufacturing facilities rather than commercial establishments, as they are basically refineries. 12 The data assembled by GE’s Distributed Power marketing team on reciprocating engines is insufficient for understanding the sectoral distribution of the engines. Good data on where engines actually land is quite sparse. 13 https://www.iea.org/chp/ 14 International Energy Agency, “Combined Heat and Power. Evaluating the Benefits of Greater Global Investment.” 2008 https://www.iea.org/publications/freepublications/publication/chp_report.pdf 15 International Energy Agency, “Linking Heat and Electricity Systems. Co-generation and District Heating and Cooling Solutions for a Clean Energy Future.” 2014 https://www.iea.org/publications/freepublications/publication/LinkingHeatandElectricitySystems.pdf

Now You See It… Now You Don’t…

While these technologies represent a considerable share of the energy generation portfolio in some countries, global deployment of co-generation and efficient DHC has been much less successful – global electricity generation from co-generation was reduced from 14% in 1990 to around 10% in 2000, and it has remained relatively stagnant since then.

8 9

This Time is Different

The advantages of CHPs are clear. To name a few: They use fuel more efficiently than separate power and heat production systems, up-front Capex investments can usually be paid off within a few years, and DG power suffers no line losses and doesn’t require expensive transmission and distribution. But while the benefits of CHP haven’t really changed, what has changed, is that a confluence of several macro-level factors has shrunken or directly confronted many of the aforementioned barriers to adoption. Having grown stronger in recent years, none of these factors can make the difference by themselves,

but taken together, they are nudging decision-making and changing outcomes. Perhaps the most important factor is the demand for an increasingly resilient power system. Other factors in question are increased climate and environmental awareness, the emergence of a social movement espousing energy democracy, pressures exerted by regulatory and policy actions. In addition, a shrinking gap between electricity and natural gas prices that's partly due to more plentiful gas supplies, new business models favor CHP production, and improvements in reciprocating engines technology as well as the growth of the Internet of Things (IoT).

Several macro-level factors are nudging decision making and changing outcomes.

• Demand for an increasingly resilient power system

• Increased climate and environmental awareness

• The emergence of a social movement espousing energy democracy

• Pressures exerted by regulatory and policy actions

• A shrinking gap between electricity and natural gas prices, partly due to more plentiful gas supplies

• New business models that favor CHP production

• Advances in reciprocating technology and IoT

Those barriers are many:

• Lack of motivation.

With stable and reliable energy systems, and little or infrequent societal pressure to reduce energy use or emissions or change the way energy is delivered and consumed, there has been little incentive for CHP generation.

• Regulatory hurdles and grid access.

Laws such as PURPA or the UK’s CHP regulation don’t eliminate the regulatory risk involved in owning/operating a small power plant. Moreover, since distribution utilities do better financially by selling as much electricity as possible, they put obstacles in the way of DG, such as high interconnection costs, or high fixed costs or “standby costs” associated with being on the grid. Some locales bar electricity end users from producing their own power; other places prohibit them from selling any power (even small amounts of “excess power”) to the grid. Without sufficient grid access, DG investments don’t always pay off.

• Insufficient policy signals.

While government policies have promoted CHP adoption, they haven’t been strong enough to overcome all the barriers. Comprehensive CHP policy that simultaneously addresses the incentives to utilities and end users, as part of a broader energy policy, is rare.

• Lack of price pressure.

Saving money on energy costs is appealing only if energy costs are high or volatile. US commercial entities typically have paid a lower price per Kwh of electricity than residential customers and, relative to other countries’ bills, these costs have been historically low. Electricity prices also have been relatively stable, though natural gas prices have been anything but.

• No in-house expertise.

Commercial businesses owners, industrial facility leaders, and real estate owners typically aren’t knowledgeable about power systems engineering. Having to hire experts to operate equipment for and make informed decisions about those systems is burdensome.

• Capital budgeting and short payback periods.

A five-year payback period often is too long for a small business to justify an investment. At one time, a 20- or 30-year payback was the norm for traditional, regulated monopoly utilities, but without guaranteed profits, a small business may be unwilling to take that risk. Moreover, even with a high Net Present Value and quick payback period, the CHP plant would compete for capital allocation with more “core” investments such as a new MRI machine at a hospital or physical plant upgrades at a housing complex.

The Catalysts

The IEA also lays out a series of ideas, including some policy recommendations to overcome some of the barriers that have plagued CHP adoption for years.

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1. Demand for Resilient Power SystemsThe power systems that exist in developed countries are remarkably reliable. Some might even argue that the systems are unnecessarily reliable because of the costs exacted by their redundancies and safeguards and by the need for expensive transmission and distribution lines that can increasingly isolate at-risk parts of a grid. Systems are designed for astonishingly low loss of load probabilities and “Five Nines” reliability (99.999% uptime or 5.26 minutes of downtime per year).”

However, factors outside the physical grid design impose reliability risks that are not well mitigated by traditional reliability measures.

For example, as global average temperatures rise, so does the energy in storms and the frequency of intense storms. The National Oceanic and Atmospheric Administration (NOAA)16 has tracked a steady increase in the incidence of intense storms in the Atlantic. From the mid-1990s to 2012, the annual average number of intense storms hovered around 300 – about double the annual average of around 150 storms for the preceding 20 years (see chart below). In 2012 alone, there were 286 tropical storms and 122 hurricanes.

16 http://www.nhc.noaa.gov/data/hurdat/hurdat2-1851-2015-070616.txt

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In October 2012, Superstorm Sandy caused massive loss of life and damage in excess of $50 billion.17 It also wreaked havoc on power systems up and down the East Coast. According to the National Association of State Energy Officials and the US Department of Energy, residents in 20 states plus the District of Columbia experienced significant outages18 – with more than 2.6 million of them in New Jersey (65% of customers) and more than 2 million of them in New York.19 All told, roughly 8 million people lost power.

Weather-related events (hurricanes, tropical storms, severe storms, etc.)

also are causing more frequent electric disturbances – especially over the past seven to eight years (see charts below).

While 2011 was a particularly damaging year, the overall trend is increasing. The annual average number of events nationally jumped from 37 during 2000-2007 to 78 from 2008-2015. Even removing 2011 as an outlier, the average number of events since 2008 was 70 per year.20 In 2017, devastating hurricane activity included Harvey, Irma, and Maria which impacted Puerto Rico, Florida, and Texas. Maria was the strongest hurricane to hit Puerto Rico in 89 years while Irma

resulted in 6.5 million customers or 65% of Florida homes and businesses without electricity. The United States has never been hit by three storms this strong in the same season in modern historical records.

Hurricanes and Tropical Storms in the Atlantic

Annual Weather-Related ElectricDisturbance Events, by FERC region

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17 http://www.nhc.noaa.gov/data/tcr/AL182012_Sandy.pdf 18 Mansfield, M. and Linzey, W., NASEO. “Hurricane Sandy Multi-State Outage & Restoration Report, CASE NO: 9308 before the Public Service Commission of Maryland, February 1, 2013.” https://www.naseo.org/Data/Sites/1/documents/committees/energysecurity/documents/md-sandy-multi-state-outage-report-(february2013).pdf 19 Ibid.20 Data on electricity events and disturbances taken from US Department of Energy, Office of Electricity Delivery and Energy Reliability, “Electric Disturbance Events (OE-417) Annual Summaries,” https://www.oe.netl.doe.gov/OE417_annual_summary.aspx

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Superstorm Sandy marked a turning point in the conversation, where the need for resilient power…became just as important as reliable power…Sandy focused new attention on the resilient quality of DG and renewable resources

Despite the overall increase in weather-related outages, it was Superstorm Sandy that marked a turning point in the conversation, where the need for resilient power (the ability to bounce back from outages), became just as important as reliable power (the ability to withstand most threats to power delivery).

Within the following year, Sandy focused new attention on the resilient quality of DG and renewable resources:

• In March 2013,

an ICF International report reviewed 14 case studies on CHP performance during Sandy and other outages and found that, in each case, the power systems continued to perform despite surrounding blackouts. ICF concluded: “In general, a CHP system that runs consistently throughout the year is more reliable in an emergency than a backup generator system that only runs during emergencies. Because it is relied upon daily for needed energy services, a CHP system is also more likely to be properly maintained, operated by trained staff, and to have a steady supply of fuel.” 22

“In general, a CHP system that runs consistently throughout the year is more reliable in an emergency than a backup generator system that only runs during emergencies. Because it is relied upon daily for

needed energy services, a CHP system is also more likely to be properly maintained, operated by trained staff, and to have a steady supply of fuel.”

• In September 2013,

a joint report from three US government agencies – the Departments of Energy (DOE), Housing and Urban Development (HUD), and the Environmental Protection Agency (EPA) – noted that “Time and again, CHP has proved its value as an alternative source of power and thermal energy (heating and cooling) during emergencies, and demonstrated how it can be a sound choice in making energy infrastructure more resilient in the face of extreme weather events.” 23

“Time and again, CHP has proved its value as an alternative source of power and thermal energy (heating and cooling) during emergencies, and demonstrated how it can be a sound choice in making energy infrastructure more resilient in the face of extreme weather events.”

• In November 2013,

President Obama issued an executive order for the Federal government to “develop and provide authoritative, easily accessible, usable, and timely data,

information, and decision-support tools on climate preparedness and resilience.”24

The order spawned the creation of NOAA’s Climate Resilience Toolkit (https://toolkit.climate.gov/), which includes, among other things, a case study of the 2008 CHP installation at Greenwich Hospital in Connecticut, consisting of two reciprocating engines and a backup generator. It reported the following: “Hurricane Sandy knocked out power in the area surrounding Greenwich Hospital for approximately seven days. However, when the grid power was lost, the hospital was down for just seven seconds before its backup generators kicked in and restored power. The transition from using grid power to operating solely on the CHP system went as planned. During the brief re-launch time, backup generators supplied power to the hospital. This entire transition process took approximately five minutes.” 25

22 Hampson, A, et al., “Combined Heat and Power: Enabling Resilient Energy Infrastructure for Critical Facilities.” ICF International, prepared for Oak Ridge National Laboratory. ORNL/TM-2013/100. March 2013. http://www1.eere.energy.gov/manufacturing/distributedenergy/pdfs/chp_critical_facilities.pdf 23 US EPA, US DOE, US HUD. “Guide to Using Combined Heat and Power for Enhancing Reliability and Resiliency in Buildings.” September 2013. 24 Executive Order 13653, “Preparing the United States for the Impacts of Climate Change” http://www1.eere.energy.gov/manufacturing/distributedenergy/pdfs/chp_for_reliability_guidance.pdf 25 http://toolkit.climate.gov/case-studies/hospital-plans-ahead-power-serves-community-through-hurricane-sandy

26 http://money.cnn.com/2013/01/09/technology/security/infrastructure-cyberattacks/ 27 Lloyd’s and the University of Cambridge Centre for Risk Studies, "Business Blackout: The Insurance Implications of a Cyber Attack on the US Power Grid, Emerging Risk Report." 201528 Electricity Information Sharing and Analysis Center. “Analysis of the Cyber Attack on the Ukrainian Power Grid. Defense Use Case.” March 18, 2016 http://www.nerc.com/pa/CI/ESISAC/Documents/E-ISAC_SANS_Ukraine_DUC_18Mar2016.pdf 29 http://www.bloomberg.com/news/articles/2015-07-21/nonstop-cyber-attacks-drive-israel-to-build-hack-proof-defense30 Campbell, Richard, “Cybersecurity Issues for the Bulk Power System,” Congressional Research Service, June 10, 2015. https://www.fas.org/sgp/crs/misc/R43989.pdf

Weather-related events aren’t the only external forces that can bring down a system. Increasingly, cyber attacks are targeting power systems across the world. In fact, there was a 52% increase in cyber attacks on US power, nuclear and water facilities in 2012, the same year that Sandy hit. 26 The costs of these attacks can be devastating. According to a study by Lloyd’s and the University of Cambridge Centre for Risk Studies, a sophisticated attack that would target 15 US states could cause $250 billion to $1 trillion in losses and leave 93 million people without power. 27

Neutralizing the impact of cyber attacks

The cyber sabotage is inventive and relentless. Consider what happened in December 2015, when a cyber attack triggered by an illegal computer entry into

a SCADA system disrupted three different distribution systems in the Ukrainian electrical grid, resulting in outages for approximately 225,000 people. 28 Or look at Israel, where the Israel Electric Corporation reported that it faced 20,000 cyber attacks per hour in 2014. 29

The Congressional Research Service reported in 2015 that distributed generation could add to grid resilience. “Renewable electricity in distributed generation installations and microgrids has the potential to resist disruptions to the grid, whether from natural occurrences or cyber attacks, by continuing to generate power if the grid is brought down.” 30 (Ironically, the report also notes that DG’s very nature also provides hackers with additional potential “back doors” into the grid if the communications systems (e.g., smart meters) are not well protected.)

“Renewable electricity in distributed generation installations and microgrids has the potential to resist disruptions to the grid, whether from natural occurrences or cyber attacks, by continuing to generate power if the grid is brought down.”

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2. Climate Change In December 2015, almost 200 nations at the 21st Conference of the Parties to the United Nations Framework on Climate Change (AKA COP 21) agreed to reduce emissions to levels that would limit global temperature change to 2 degrees Celsius.31 Each nation submitted an Intended Nationally Determined Contribution (INDC), and committed to a “global stock take” every five years to help ensure that emissions are on track to meet targets.

The climate deal is far from perfect, and naysayers rightly point out that there is little to prevent an individual country from going back on its commitments. However, several major emissions-producing economies, including the European Union and China, have serious, tangible climate or clean energy plans and policies in place or on the table. And, criticism of the agreement’s reliance on a form of “peer pressure” among nations ignores the fact that nation-to-nation agreements often rely on peer pressure. “International agreements operate under good faith … Whether a country is an upstanding member of the international community is what’s at stake,” 32 pointed out Michael Burger, executive director of Columbia Law School’s Sabin Center for Climate Change Law.

And climate change also is being combatted in other ways. Internationally, public- and private-sector commitment to rapidly increase available Research & Development funding on climate-friendly technologies is strong. The Breakthrough Energy Coalition, spearheaded by Bill Gates, will mobilize private capital to invest early in transformative ideas. Gates’ Coalition partners include Richard

Branson, Jeff Bezos, George Soros, Vinod Khosla, Jack Ma, and Mark Zuckerberg. Parallel to the Coalition is the Mission Innovation initiative, under which 20 countries have committed additional funds to accelerate the pace of Research & Development that will that will “revolutionize clean energy solutions.” 33

That isn’t all. The newly formed Global Covenant of Mayors for Climate & Energy will put climate and clean energy concerns at the forefront of urban policy – the center of gravity for DG-CHP – by building on initiatives from more than 7,100 cities from 119 countries. The Global Covenant’s stated core principles include “Reducing Greenhouse Gas Emissions and Fostering Local Climate Resilience” by emphasizing “the importance of both climate change mitigation and adaptation, as well as universal access to clean energy.”

There is a generational shift in attitudes about climate change, too. According

to the Pew Research Center, 53% of Americans ages 50-64 express “some” or “a great deal” of concern about climate change, but 67% of Americans ages 30-49 also feel that way. 34 As that younger population increasingly shifts into roles as building managers and owners, the commercial real estate community’s actions likely will follow suit. In fact, the US population as a whole is becoming more concerned about climate change. More than 70% of Americans now believe that it is “fairly likely” or “very likely” that climate change will cause harm to plants and animals, that storms will become more severe, that drought incidence and severity will increase, and that shorelines will erode. 35

Climate change policies spurred by COP 21 and other GHG mitigation programs will not, by themselves, lead to a significant uptick in DG-CHP, but climate policy and concerns are increasingly “in the air,” influencing the conversation.

31 http://unfccc.int/paris_agreement/items/9485.php 32 Think Progress, “No, The Paris Climate Agreement Isn’t Binding. Here’s Why That Doesn’t Matter” https://thinkprogress.org/no-the-paris-climate-agreement-isnt-binding-here-s-why-that-doesn-t-matter-62827c72bb04#.d7l7l4tkl 33 http://mission-innovation.net/about/34 Pew Research Center. “The Politics of Climate,” September 30, 2016. http://www.pewinternet.org/2016/10/04/the-politics-of-climate/ps_2016-10-04_politics-of-climate_0-03/ 35 Ibid., http://www.pewinternet.org/2016/10/04/the-politics-of-climate/ps_2016-10-04_politics-of-climate_1-06/

Figure 1: Doubling innovation. http://mission-innovation.net/baseline-and-doubling-plans/

Clean Energy R&D Investment Chart for Mission Innovation

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3. Energy DemocracyA new social movement is emerging around the idea of energy democracy, whose advocates insist that choices and decisions about electricity production should be made by consumers, rather than “dictated” by utilities or regulators. Beyond that, the energy democracy movement seeks to control production. Reliable, affordable and clean energy may be desired goals but, as the following passages illustrate, local control is the guiding principle of the energy democracy movement. “Reforming the Energy Vision (REV, an initiative in New York) is an opportunity to fight for energy democracy,” asserts the New York State Energy Democracy Alliance, “so that residents and communities can be full participants in a clean energy future – from owning renewable energy projects, controlling how we distribute energy, or gaining the power to make decisions about how energy investments are made in our neighborhoods.”36

“Reforming the Energy Vision (REV, an initiative in New York) is an opportunity to fight for energy democracy,” asserts the New York State Energy Democracy Alliance, “so that residents and communities can be full participants in a clean energy future – from owning renewable energy projects, controlling how we distribute energy, or gaining the power to make decisions about how energy investments are made in our neighborhoods.”

In that same vein, North Carolina’s Alliance for Energy Democracy (AED) says that its mission “is to organize and advocate at the local and state level for an electric energy system in North Carolina that is just, equitable, participatory and democratically controlled.” 37

However, it’s not just advocacy organizations that use the term “energy democracy.” Dr. Sophie Vandebroek, the CTO of Xerox, was one of multiple speakers who talked about energy democracy at the US Department of Energy’s 2016 ARPA-E Energy Innovation Summit. 38 Intriguingly, in April 2016, National Grid President Dean Seavers authored a white paper, entitled “The Democratization of Energy: Climate Change, Renewables and Advancing the American Dream,” 39 in which he argued: “First, we must put customers in charge. Consumers will make the right choices if they have the right tools and information."40

Indeed, there is evidence that the movement is gaining traction because entities other than advocacy organizations are speaking the language of energy democracy – and because academics have already begun to study the concept.41 Although there isn’t a direct cause-and-effect relationship between energy democracy and an upswing in DG-CHP, the movement signals that change is afoot.

36 http://energydemocracyny.org/reforming-the-energy-vision-information 37 http://allianceforenergydemocracy.org/mission/ 38 https://arpa-e.energy.gov/?q=events/2016-arpa-e-energy-innovation-summit 39 https://www.nationalgridus.com/media/pdfs/our-company/ng_ebook.pdf 40 Seavers, Dean. “The Democratization of Energy. Climate Change, Renewables and Advancing the American Dream.” National Grid, April 2016. (Ibid.)41 See, e.g., Joseph P. Tomain, The Democratization of Energy, 48 Vand. J. Transnat'l L. 1125 (2015). http://scholarship.law.uc.edu/fac_pubs/308/

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• One of the most prominent CHP regulatory activities outside the US is the new (2016) CHP Act in Germany, which furnishes additional revenue to electricity generated from CHP. The act specifically promotes gas CHP over coal CHP, and provides payments per Kwh generated: The smaller the DG-CHP installation, the higher the payment per Kwh. Thanks to the CHP Act, CHP-generated electricity is expected to rise to 110 TWh per year by 2020 and to 120 TWh per year by 2025.

• Elsewhere in Europe, there has been regulatory movement to incentivize CHP in Slovenia, Poland, and France, all within the last year. The French CHP regulation, which updates the previous one, requires developers of CHP projects that produce more than 1 MW to apply in an auction process to receive a CHP incentive payment. The change is to ensure there is no over-subsidizing of CHP – which implies that there is a very healthy demand and return on investment for CHP. As noted earlier,

several European countries have had robust CHP policies in place for years, notably the Netherlands. The IEA’s latest CHP Country Scorecard gives Sweden a 4.5 out of 5. Italy has a slew of CHP-friendly policies, including white certificates, fossil fuel tax exemptions for CHP, net metering and other provisions to encourage DG generation sold to the grid.

• Recent energy reform in Mexico, coupled with the opening of the electricity marketplace to IPPs, is expected to encourage DG producers. Moreover, Mexico established a clean energy certificate program (trading will start in 2018) that will incentivize CHP and DG.

• In Brazil, the government of Sao Paulo established lower natural gas rates for CHP installations, and the national government has developed incentives to generate electricity with biogas (including from solid waste streams), which will promote the use of DG engines – including those configured for CHP.

As with climate policy and the emphasis on resilience, while no single program or regulation is creating a breakthrough for widespread adoption of DG or DG-CHP, a slew of individual actions have coalesced to provide momentum in that direction. The fact that regulatory commissioners are thinking about distributed energy resources (DER) in a largely positive and structured way is a sign that broader-based changes are a foot.

4. Regulatory and Policy Actions A number of new regulatory approaches also has begun smoothing the path for DG-CHP. Some of these are extensions of past practices, but others are paving new ground that may be more fertile than past efforts. Several recent or proposed policies directly or indirectly incentivize DG-CHP in the US:

• The EPA’s “Boiler MACT” rule 42 sets emissions limits on 14,000 boilers, an estimated 1,700 of which are expected to take action to meet those limits 43 – including installation of natural gas CHP plants. To help facilities comply with the rule and understand the options and incentives available to them, DOE provided technical assistance to 53 sites with a potential installed CHP capacity of 724 MW. DOE estimates that all of the affected boilers, if outfitted with CHP installations, could produce 1.2 GW.44

• CHPs are being included in the Integrated Resource Plans (IRPs) of states such as Connecticut, whose 2015 IRP calls for an additional 170 MW of CHP.

• The renewable portfolio standards of 21 states treat CHPs as a renewable energy technology, and 16 states treat CHP as part of their Energy Efficiency Resource Standards. 45

• In June 2016, the Federal Energy Regulatory Commission upheld a rural co-op’s decision to buy power from a DG source, ruling that PURPA obligated the co-op to buy the power. FERC upheld that ruling, even though it said

the co-op violated contractual terms with another supplier. 46

• Perhaps the most eye-catching policy change is New York State’s REV plan, which upends the traditional structure for delivering electricity by creating a system built from resources on the distribution side of the grid. Under REV, utilities will be Distribution System Platform Providers (DSPPs), sometimes described as a distribution analog to an independent system operator. REV goals include a 40% reduction in greenhouse gases from 1990 levels and a 23% reduction in building energy consumption from 2012 levels. In September 2015, as part of New York’s plan, Governor Andrew Cuomo announced 53 new CHP projects across the state. CHP proliferation throughout New York can be expected as REV

progresses and as the DSPP system becomes more concrete.

• Related to REV, and to take safeguards against "the next Sandy," the New York State Energy Research and Development Authority (NYSERDA) has established a program called NY Prize Opportunity Zones to encourage creation of a series of microgrids throughout New York City. CHP installations built under this program receive an additional 10% incentive. The program also seeks to relieve distribution congestion at a very local level – down to the street grid. The zones were drawn by NYSERDA and ConEd, and their specificity is striking. See, for example, the block-by-block zones in sections of Brooklyn and Manhattan, below. 47

42 The formal title is National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial, and Institutional Boilers and Process Heaters43 ICF International. “Financial Incentives Available for Facilities that are Affected by the US EPA ‘National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial, and Institutional Boilers and Process Heaters; Proposed Rule’ December 2012”44 http://energy.gov/eere/amo/boiler-mact 45 Delta Energy & Environment, “USA Country Report – Updated July 2015”46 Inside Energy, “A Battle Over Bringing Local Renewables To Rural Electric Co-ops,” September 2, 2016 http://insideenergy.org/2016/09/02/a-battle-over-bringing-local-renewables-to-rural-electric-co-ops/ 47 NYSERDA web site: https://www.nyserda.ny.gov:443/All-Programs/Programs/NY-Prize/ Opportunity-Zones-Map/Opportunity-Zones/NYPrize-Region-Map

18 19

6. New Combined Heat and Power-Friendlier Business Models As noted above, a significant barrier to DG-CHP adoption in the past has been that most facility owners lack knowledge and experience regarding CHP, since CHP isn’t part of their core business. Understandably, landlords, or even their energy managers, have balked at becoming owners/operators of power plants. Commercial enterprises have scarce capital resources, and their owners rightly view large capital expenditures on items outside their core as second- or third-choice options. These businesses have had valid reasons for rejecting or delaying any move toward CHP, among them reluctance to dealing with regulatory agencies, project development, exposure to fuel price risk, and the operation of major equipment. But emerging business models address these concerns and solve those problems.

For example, GE together with trusted and proven parties are taking a cue from solar companies to, essentially, make CHP easy. Facility operators are no longer burdened with project development or arranging financing, nor must they deal with regulators, accept price fuel risk, or even operate the plant. This new approach simply requires the facility owner to pay a monthly fee that covers the capital costs for the equipment (with financing provided by a external party), the operating expenses (with O&M provided by another external party), and the fuel expenses. At the end of the financing period, the customer can opt to “re-up,” or buy (and operate) the equipment outright, or have the equipment removed.

GE together with trusted and proven parties are taking a cue from solar companies to, essentially, make combined heat and power easy.

7. Reciprocating Technology and IoT Advances We tend to assume that technologies as mature as the reciprocating engine or CHP have plateaued, but the steady march of technology innovation belies this assumption (see chart below). While GE’s Jenbacher* Type 6 gas engines can reach 47% efficiency in stand-alone, simple cycle mode, they can reach 90%+ efficiency in CHP mode. At the same time, the break mean effective pressure 50 (a measure of useful power output) has steadily climbed as well. Put simply, an engine installed today is roughly 1.5 times more efficient than - and produces more than an engine installed in 1988, and it produces more than twice the power, too. And those capabilities are getting even better. For a building owner, that translates into significant energy cost savings, even at today’s low gas prices.

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* Indicates a trademark of the General Electric Company50 Break mean effective pressure or BMEP is the average force being produced against the pistons that are creating useful power production over the course of an engine cycle. Also, see: http://www.epi-eng.com/piston_engine_technology/bmep_performance_yardstick.htm?_sm_au_=ijHnLT3TN5qNJM54

5. Shrinking Price Gap First and foremost, for a DG-CHP installation to be financially attractive to a facility owner, the cost of self-producing electricity and heat together must be less than the price of paying for them separately from the grid and a heating utility (or, in many cases, less than buying electricity and self-producing heat from a boiler). In many power systems, particularly in the US, commercial and industrial consumers have paid a relatively low price for grid electricity. That’s partly because implicit industrial policy essentially cross-subsidized industry, and partly because of bulk discount rates (the more electricity purchased, the better the volumetric rate). Traditionally, commercial and industrial electricity rates climbed slowly. For example, US Energy Information Administration data shows that 48 the average rate for commercial electricity users in the US was $0.0946/Kwh in 2006 and $0.1059 in 2015. During that same period, the average rate for industrial electricity users rose even less, from $0.0616 in 2006 to $0.0689 in 2015. In real terms, this modest price increase has been effectively zero. Even if the starting point is 2010, after the global commodities bubble and recession, electricity prices have been flat in real terms.

However, while electricity prices have been flat, natural gas prices have fallen sharply – partly because shale gas production has given a big boost to available supplies. Nationally, average natural gas prices (in real terms) paid by commercial consumers are roughly 70% of what they were in 2010 and 50% less than in 2006. 49 But the change is much more dramatic in states such as New York, where the average real price for natural gas that commercial customers paid in 2016 was roughly 50% of the average paid in 2010 and 40% of the average in 2006.

2015 and 2016 may represent historic lows in gas prices because supplies increased without a corresponding increase in demand. However, even as demand slowly increases, gas prices are expected to stay relatively low because production costs have dropped and increasing LNG volumes will make LNG’s value more competitive. Thus, the spread between the purchased prices of electricity and gas may have undergone a fundamental shift that will continue to advance the financial viability of DG-CHP projects.

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As described previously, the intersection of several factors has increased the motivation to pursue distributed generation: the demands for clean energy and resilient grids, the push for energy democracy, helpful regulatory and policy shifts, favorable energy price spreads, technological progress, and new business models to make Capex investments much safer and more rewarding. But there are other signs that DG adoption appears to be becoming more mainstream.

In its new DER-oriented survey of more than 500 North American utility executives, 53 Utility Dive, a news service covering the power sector, found that 40% of respondents reported that they are pursuing DG storage; 36% responded that they are offering rooftop solar; and 19% responded that they are offering microgrids-as-a-service to customers. Similarly, when they were asked, “In which technologies do you think your utility should invest more?”, 52% answered “distributed generation.” When they were asked “How do you think your utility’s power mix will change over the next 20 years?”, 42% said that they expected a significant increase in DG and 49% expected a moderate increase. Lastly, when they were asked, “How do you believe your utility should build a business model around distributed energy resources?”, 60% said they would partner with third-party providers while only 5% said that they didn’t believe that their utility should have a DER business.

Perhaps one of the most encouraging signs of new or re-invigorated regulatory attention to DG in the US is the 2016

publication by the National Association of Regulatory Utility Commissioners of their draft manual – released in the summer – on compensation for distributed resources. 54 It’s important to note that a final version – seen in a somewhat different light by DER supporters – was released in November. 55

The manual points out that “Rapid proliferation of DER in a few jurisdictions has led to a national discussion and highlighted the issues that increased adoption of the technologies represents for regulators, utilities, and customers, alike.” 56 The report identifies several rate structure-related issues that regulators must grapple with including, among others, differentiating customers and specific uses of – and services to – the grid, long-term vs. short-term costs and benefits, how DER affects infrastructure costs, DER benefits for grid resiliency, and the extent to which DER customers may rely on the grid at peak demand.

Granted, advocates of DER did not view NARUC’s draft as fully positive, but still acknowledged it was an important step. For example, the Regulatory Assistance Project (RAP) commented that NARUC should consider DER as more of a resource and service than a cost to the grid, should value that service, and consider that value in devising rate structures. RAP notes how regulatory actions can make or break the DER value story: “Through inefficient compensation and other barriers to entry, regulation can either slow the deployment of these resources, or it can begin to value them properly and allow utilities and

consumers to make informed investment decisions. The growing transactional nature of the power system calls for quality of rate design to adapt. One aspect of this adjustment will be the development of sound practices built for coming decades to help reveal the value of all utility resources and facilitate efficient long-term utility sector investments.” 57

The final version of the manual won praise from DER advocates, including RAP and others. Utility Dive quoted Sean Gallagher of the Solar Energy Industry Association as saying, “This manual marks an important turning point … It … starts to address the question of how to unlock the value of DER by recognizing they can provide grid benefits and are not just a problem to be solved.” 58

Through inefficient compensation and other barriers to entry, regulation can either slow the deployment of these resources, or it can begin to value them properly and allow utilities and consumers to make informed investment decisions. The growing transactional nature of the power system calls for quality of rate design to adapt. One aspect of this adjustment will be the development of sound practices built for coming decades to help reveal the value of all utility resources and facilitate efficient long-term utility sector investments.

* Indicates a trademark of the General Electric Company51 Op Cit., Platts Utility Database International52 As noted earlier, Platts’ coverage of reciprocating engines is not exhaustive, but nevertheless the trend here is strong enough to suggest a similar trend in the full population.

53 Utility Dive “2016 State of the Electric Utility Survey.” 54 NARUC, “NARUC Manual on Distributed Energy Resources Compensation, DRAFT,” 201655 NARUC, “DISTRIBUTED ENERGY RESOURCES RATE DESIGN AND COMPENSATION.” A Manual Prepared by the NARUC Staff Subcommittee on Rate Design. http://pubs.naruc.org/pub/19FDF48B-AA57-5160-DBA1-BE2E9C2F7EA0 56 Ibid.57 Regulatory Assistance Project, “Comments on NARUC Distributed Energy Resources Compensation Manual,” August 16, 201658 Utility Dive. “A 'turning point' for DERs? Utilities, vendors praise new NARUC rate design manual.” November 17, 2016. http://www.utilitydive.com/news/a-turning-point-for-ders-utilities-vendors-praise-new-naruc-rate-design/430621/

The variety of advanced technology solutions is growing, too. Commercial buildings and industrial facilities usually have very specific, if not unique, energy needs. Rarely does a one-size-fits-all approach work. The greater variety of choices, the more likely it is that one of them will fit a particular application. For instance, the average MW size of reciprocating engines installed from 2000-2015 has increased, but so has the standard deviation of the MW size (see chart below), 51 providing more choice for facility owners. 52

Beyond advances in engine technology and more solutions variety, the growth of the “Internet of Things” (IoT) will improve the prospects for distributed generation. IoT – the confluence of Big Data, smart algorithms, and proliferating data communications devices that enable data use – has arrived in the power sector, which is perfectly suited to realize its full potential. No other large industry relies as much on instantaneous communication, yet currently that communication isn’t optimized. By applying IoT technology like GE’s Predix* to the grid, power systems can more easily integrate distributed energy resources so that they deliver increased value and services to the full grid. IoT also will enable more accurate pricing and pricing signals for a more

distributed grid. And, it will make it possible for the machines themselves to operate more efficiently by enabling components to communicate more frequently and in more targeted ways. Hence, the DG-CHP systems will perform even better in the future.

By applying IoT technology like GE’s Predix to the grid, power systems can more easily integrate distributed energy resources so that they deliver increased value and services.

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Now is the time... for Distributed Generation Adoption

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Admittedly, CHP advocates and techno-engineering studies have been telling us for years that CHP is useful, prudent, a “win-win” and about to take off. Admittedly, despite those claims, CHP – particularly DG-CHP – has remained relatively stagnant. But this time truly feels different, because so many stars apparently are aligning for CHP: digital and physical technology improvement, increasing – even pressing – demand for

clean energy and resilient systems, a developing societal drive toward DG and “energy democracy,” shifting regulatory structures and policy incentives, and structural shifts in the natural gas marketplace and pricing. Against this backdrop, the emergence of new business models to make CHP adoption easy and profitable will create a new, dynamic arena for DG-CHP.

Now is the time. Finally.

Conclusion

AcknowledgementsThank you to the many people who made helpful contributions to this paper, particularly Beenaa Diwakar, Andreas Eberharter, Thomas Elsenbruch, Shanique Farquharson, Christof Malaun, Devon Manz, Michael Norelli, Burak Ozsoylu and Susanne Reichelt.

Author’s BiographyMichael Leifman authored this white paper while he was Innovation Strategist for GE’s Market Intelligence team. Prior to GE, Michael was the lead analyst in US DOE’s Office of Energy Efficiency and Renewable Energy, and a climate policy and economics analyst at US EPA. Michael also worked for an environmental policy consulting firm, analyzing a diverse set of issues, from chicken waste to the Kyoto Protocol. He holds master’s degrees from Johns Hopkins and Carnegie Mellon, and a bachelor’s degree from The University of Chicago. He lives in Washington, DC with his wife and two sons.

For more information contact T + 1 518-430-5011 [email protected]

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GE’s Distributed Power business unit of the General Electric Company. The GE brand and logo are trademarks of the General Electric Company. © 2017 General Electric Company. Information provided is subject to change without notice. All values are design or typical values when measured under laboratory conditions.

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